For investors starved of yield, it was an appealing proposition: a potential 13% return. You just had to be willing to take a flier on the future earnings of 1,000 coders.

That was the payout being targeted late last year for a swath of income-sharing agreements tied to students and recent graduates of coding academy Lambda School, according to a presentation from an online lending platform that specializes in student-loan alternatives. The participants pay no tuition upfront but pledge to remunerate 17% of their incomes for 24 months after landing a job that pays more than $50,000 a year. Repayment is capped at $30,000.

Lambda is one of several schools experimenting with similar income-sharing agreements. Four-year colleges including Purdue University and the University of Utah offer the contracts, as do a handful of other coding bootcamps and technical training programs. In some cases, the agreements are bundled and sold to investors. Interest in the contracts is growing at a time of persistently low yields around the world and ballooning U.S. student debt -- an increasingly hot-button issue in Washington.

“ISAs play a potentially important role addressing systemic issues of access, affordability and quality of higher education and skills training in the U.S.,” said Chuck Trafton, president of Edly, the investment platform behind the presentation. Trafton co-founded Edly with former Merrill Lynch structured products head Chris Ricciardi, known for pioneering collateralized debt obligations.

Investors in the Lambda offering receive a group of 1,000 students’ ISA payments until they reach a 13% return on their investments after fees, the documents show. Lambda takes 60% of any residual cash flow after that, while investors get 40%. About 10% of students in the investment pool were working and making payments in December, 28% had graduated and were expected to begin making payments in the coming months and the remainder were still in school.

About 86% of graduates whose ISAs Lambda holds were current on their payments, while 3.2% were 30 days delinquent, and 1.2% had fulfilled the terms of their agreements.

The estimated default rate on the Lambda agreements was 8.6%, according to the presentation. Nationwide, about 11% of student debt was seriously delinquent or in default at the end of 2019, according to the Federal Reserve Bank of New York.

Lambda’s use of the ISA model has come under fire in recent days after The Verge and New York Magazine reported that some students were unsatisfied with the education they received at the school and asked to be released from their ISA agreements. New York Magazine also called into question Lambda’s claim that 86% of graduates get hired within 6 months in jobs that pay more than $50,000 annually.

The investor documents seen by Bloomberg list a six-month job placement rate of 54%. In a web conference for prospective ISA investors, Lambda School chief executive officer Austen Allred said the figure represented a placement rate “basically at its bottom” and said it had been “much higher recently.” He said the company was relying on “conservative assumptions from our historical outcomes” to help price the investments.

The numbers used in the presentation were based on all students who completed the Lambda curriculum at the time, regardless of their level of engagement with the school’s career services team or what courses they completed, and as such were a conservative indication of outcomes, a representative for the program said via email.

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